MAY 2010
                                        

ON TOPIC


Terry Weaver

Metals market ponderings

The demand for metals is recovering from the declines that began in 2008. This has affected the entire metal industry – from recyclers to producers. While recovery has begun, the ongoing economy is still affecting the industry.

Bob Garino, Institute of Scrap Recycling Industries, Inc.’s director of commodities, offered his perspective on where the market has been and where it is heading.

Has the market for raw and recycled metals recovered from 2008?

Garino: We found 2008 to be a most difficult year for the recycling industries. Last year saw some manufacturing and service industries react favorably compared to the lows experienced in the first two quarters of 2009. However, other industries – the housing and automotive sectors especially, languished through most of 2009. The Earth Policy Institute has estimated, that for the first time since the Second World War, that more automobiles were scrapped last year than were purchased.

While 2009’s global gross domestic product (GDP) decreased by 1 percent, according to most published sources, the American GDP dropped by 2.4 percent – the biggest annual rate of decline since 1946. From the perspective of the metals-intensive industrial production sector, recovery and economic growth did not occur in North America, but in China and India showed 8.7 and 6.4 percent GDP growth rates respectively. In fact, China should receive most of the credit the global increase in the value of several metal and non-metallic commodities in 2009.

The United States Geological Survey noted that despite some “green shoots” of recovery, overall domestic metals production declined last year to its lowest level since 2005. The ongoing recession continues to curtail the domestic consumption of basic raw materials. This translated into the quantity of metals production falling by 7 percent and the attributed value of those materials falling by 22 percent to $21.3 billion.

How have declines in metal consumption for raw and recycled materials affected production, consumption and prices of metals?

Garino: ISRI research determined that the nations scrap recycling industry mirrored and exceeded the pain felt in the larger economy. This translated into a 36 percent decline in value compared with 2008. The volumes of ferrous scrap processed dropped by 27 percent, while major nonferrous metal volumes fell by 15 percent. Even scrap exports were affected. This sector – roughly 40 percent of the industry’s overall value, declined by 25 percent despite an increase in volume.

Despite the declines of 2009, we see that last year’s price trends are those of markets which are recovering. This has been supported by United States government stimulus spending, Chinese demand and currency considerations.

It should be stressed that annual comparisons with 2008 magnified the depth of the recession that began at end-2007. This explains the analysis of Macquarie Research, which determined 2009 to be a weak year for global commodity prices overall – average base metal prices falling 27.2 percent year-on-year, and steel falling 45 percent. The Dow Jones-UBS Commodity Index found that last year’s index was nearly 41 percent off the peak that was attained in 2008, despite a roughly 19 percent growth in 2009.

Precious metals led last year’s overall index, but base metals such as copper also made a contribution. This was reflected in the LME Index price for copper, which averaged $1.48/lb. in January 2009 and increased steadily throughout most of 2009. By December the price increased by 115 percent to an average price of $3.18/lb. While other metals regained considerable ground in terms of value, it was not an across-the-board affect, which was clearly demonstrated by the American steel industry.

The LME Index rose an astonishing 87 percent over last year on slightly lower trading volumes, with noticeably higher LME-held inventories for the six major nonferrous metals traded on the exchange. Credit for this should be given to China’s insatiable demand for base metals.

How has the decline in the value of metals affected the profitability of firms large and small, and how have declines in revenues affected the ability of these firms to purchase materials at a low price and build up stockpiles to be ready for a market recovery?

Garino: The processing side of the industry is a high volume/low margin business and the scrap processing industries were hurt by low volumes and low prices. Add that to credit constraints on their ability to even buy scrap. This has really created a very difficult situation for most of the companies that process scrap in 2009. Although the trend for prices in 2009 was positive, it was coming off such a low that when you compare the average price performance for 2009 versus 2008, it was a difficult year.

It has also affected those who sell scrap to the processors. Scrap flows slowed down. That was pretty apparent in iron and steel for example. It’s a two-fold problem – you have less new scrap being generated as manufacturing slows and you had lower prices that discouraged a lot of obsolete scrap from coming in, plus you also had a lot of scrap come out of the woodwork in the first half of 2008, which coincided with the price peak.

Where do you see the metals market in the next three years? Are there any trends that people should note?

Garino: We do not forecast, but do look at the metals intensive manufacturing component of industrial production as an indicator. The number comes out every month and there is a very high correlation with that index matched against prices, whether it is the LME Index, the Commodity Research Bureau Index or even our own ISRI Scrap Metal Index. As the indexes go, so do prices and we would expect to see industrial production continue positive. What we are seeing now, looking back to between 2007-2009, is a cyclical downturn, but at the same time, the secular trend (long-term) is very positive and will be for many years to come. For the most part, we have gotten through the cyclical downturn.

We realize that this is a difficult time for the industry, but recyclers and processors have to realize that they are in it for the long-haul. It’s just a matter of maintaining proper diligence in costs and that best practices are more important than ever.